Published January 9, 2022
Keiko Sydenham is CEO and co-founder at LUCA Ltd., a digital platform for alternative Investments, private equity, real estate, infra and private credit. Prior to founding LUCA, she was a managing director at Blackstone Japan, where she handled investor relations and business development. She has also held management positions at J. P. Morgan Japan (in their alternative investments division), Russell Investments, Orix Investments, and HC Asset management. She is a graduate of Tokyo University and the School of Advanced International Studies at the Johns Hopkins University. She is fluent in English, Russian and Japanese. Recorded April 22.
Jesse: Well, it's a beautiful day here in Hong Kong, and I'm very pleased to have Keiko Sydenham as our guest on today. Keiko. Very thanks very much for joining the Reorient! podcast.
Keiko: Well, thank you very much for inviting me. It's very exciting.
Jesse: We're really thrilled. You're our first guest, uh, who's Japanese who, um, can discuss Japan. Um, so which is obviously an important part of the Asia Pacific region. So, uh, it's, it's, uh, very special for us to have you on. Um, so Keiko, I'd like to first ask just a little bit about your background. Um, can you share with us sort of where you grew up.
Keiko: Yeah, sure. So I grew up a small city in Nagoya in Japan. Soand afterwards I went to, uh, college in Tokyo. And then afterwards, I actually, I spent a [00:01:00] little bit in multiple places, like in Russia, Moscow, and in Washington, DC, where I graduated, from SAIS Johns Hopkins and then New York afterwards. Uh, I worked there from 2001 to 2003. So now, then afterwards, I went back to Tokyo.
Jesse: Um, so, um, so, uh, you know, uh, most recently, um, uh, Keiko, you were a very senior director of Blackstone group and Japan. Um, so tell us a little bit about what, what type of work you are doing at Blackstone and what, what was the firms, um, sort of main objectives in Japan.
Keiko: Yeah, sure. So, uh, I was always responsible for capital raising. So basically, uh, my title was like, head of client institutional clients solutions, and which is, uh, I'm responsible for advising and supporting capital raising from, uh, institutional investors in Japan. So institutional investors, uh, are mainly like, you know, government, patient funds or like major banks and insurance companies and the corporate pensions.
And then. Blackston Japan actually started as a real estate investment location. So we have a heavy investment, uh, in real estate as Blackstone, Japan. And then, you know, um, afterwards, uh, we decided to do more marketing as a fundraising side, is that it was just like 2013. We kind of like put the resource in there.
And then more recently, uh, we started private equity investment in Japan. So we're pretty active in investment in Japan.
Jesse: So when you were raising funds capital, um, was it primarily for the global funds that are primarily United [00:04:00] States, but they could potentially invest in some of the Blackstone's Japan funds as well.
Keiko: Yes, exactly. So, oh, we don't have actually a regional standalone fund. Blackstone doesn't have it. And so it's, everything is about a global fund, but as a part of, uh, a global, uh, we could invest in Japan.
Jesse: Understood now, um, obviously Japan as the world's or it certainly was the, world's second largest economy. I'm not sure if, if China has surpassed Japan yet, um, it probably depends on how you measure it, but, uh, you know, fair fair to say the world's second largest economy with a huge savings rate. Um, so it makes sense that, um, large institutions would want to tap into this, uh, enormous savings, um, pool of savings in Japan.
uh, as a source for capital for their investment funds.
Um, could you give us a sense for, um, you know, typical, large Japanese [00:05:00] institutional investors? Uh, what were they looking for as they thought about allocating to, uh, private equity or real estate?
Keiko: Yeah. So this is very still like, you know, we call it like a private, a market investment is a very, um, beginning for Japanese institutional investors. So mainly main investment for long, long, long time has been like just sitting in JGB.
Jesse: Yes, which I should add for our audience has been actually a fantastic investment for many decades, surprisingly, because of the appreciation of the Japanese yen and also the decline in the rate on the JGB, which means a higher price. So it was surprisingly turned out to be a very wise investment for many decades.
Keiko: Right, right. Yeah. But for Japan, Japanese investors, this is like, you know, basically no currency appreciation. [00:06:00] And actually this is, you know, we don't sell the, the, the bond. So basically it's a buy and hold…So it's kind of like now a negative interest rate is implemented. So there's no way that you could just put in the money in the JGB and then hoping that this is going to grow the money. So, um, so that's, that's, you know, shifted a lot actually. And so basically most of the institutional clients, um, have been invested in a JGB or like Japanese stock and then, which, you know, Japan’s stock market has staggered for the last, I don't know, 20 years in a post, you know, bubble burst. So it's very hard to, uh, you know, uh, you know, put the money work, uh, if you just like invest in Japan. So, uh, and then, you know, started, uh, [00:07:00] investing in a foreign bond, foreign stock. And now it's because I think it's the long-dated, like negative rate, really pushed towards, uh, investing in the private market investment. It was just, you know, kind of a universal, uh, trend. Uh, but for Japan it is like, really like, otherwise you cannot put any money like in there.
So, um, big move was, uh, as, as to like institutional investors, big move was like, you know, uh, the government-related, um, uh, organization got to, it privatized, which is like, you know, like Japan Post bank or like others. So those, those are, uh, started actively allocating to, uh, alternative space, uh, to the various, uh, their portfolio.
6:43And also that, you know, world's biggest…you know, government pension fund, um [00:08:00] GPIF so they announced their alternative investment in 2015, try to target 5% allocation of their portfolio to be in private equity, real estate and infrastructure. So, but it's still like, it's, it's very, very, I think for their colleague’s portfolios, uh, just below like 1%, I think a 0.8% is in that area. So it's, it's potentially like, you know, it grows, I mean, it has to, grows to be like a growth, uh, more to, to, to investment.
Jesse: So, um, for the benefit of our audience, I make a couple of points. One is, um, the Japanese stock market actually still hasn't reached its the historic peak. Um, so if you look at the topics, it peaks somewhere around 2,880 back in [00:09:00] 1989. And today's sits at 1,920 or so, so, uh, we're still way off from the record peak.
Uh, and it's, as you said, it's sort of, it's kind of gone up and down, but really has been in a, in a, in a channel for, uh, effectively, um, uh, for twenty, gosh, I mean, I guess almost 30 years. Um, so, uh, I'm getting old because I remember some of it. Um, and the second thing I would mention is that the Japanese institutions seem to be a little bit late compared to certainly, um, uh, US and perhaps European institutions in allocating towards private investments.
And, uh, you know, my other Alma Alma mater, Yale university, uh, David Swenson, um, sort of created this foundation model or endowment model. And that was an investing, was going into a lot of private type investments. And he did this many decades ago. And I think today, [00:10:00] um, you know, um, Yale has maybe more than 50% in these types of private investments because it's viewed as a way to, um, to really have the best chance of reaching high, higher returns than certainly one could get investing in bonds or from the stock market. So it's interesting that Japan, um, I guess Japanese institutions have arrived at the same conclusion, but perhaps are still somewhat cautious and certainly much later than, uh, certainly United States and probably European peers.
Keiko: Yeah, definitely. So, um, you know, they, they, they could have like, uh, put a little bit more ambitious targets, but you know, it's as Japan is very risk averse, you know, culture and nature. So, you know, they just let go slow by slow.
Jesse: So, what is the typical target or benchmark for a large Japanese institution? [00:11:00]
Keiko: um, benchmark
Jesse: Uh, I'm sorry. Return. What's the typical return target for these Japanese large institutions?
Keiko: It's very different, actually. I, and if you see, uh, banks, of course, like they have a higher target. And then if they goes to like insurance companies really like, uh, depends on, on … policy, but in general, like, um, pension funds is like now is 2 to 3%. Uh, because that is the, uh, promised targets, right for, um, uh, patients, uh, and members. And so that was a full, at least like for last 10 years, it's around like that 2 to 3%... So if you, uh, want to invest in US and the US dollar basis, then, you know, hedging costs as you know, means [00:12:00] a lot. So sometimes like, you know, for the last, uh, few years, it was a really high and I mean around like 4% of the hedge fund kind of, it means that you need to earn 6% or, you know, uh, 8% on a US dollar basis. So that is the calculation.
Jesse: yes, that makes sense. Is it fair to say that the Japanese institutions would have a lower target return also because their sort of cost of capital is lower or some sort of …
Keiko: Yeah. Yes, definitely. And as you know, we are living in deflationary world for a long time, so we don't really put some in and, you know, expected inflation a lot. So that is another thing.
Jesse: Okay. Well, that's really a wonderful segue, um, perhaps to, uh, to Abenomics, uh, which is something, um, that I'm really keen [00:13:00] to talk to you about, I think is very important. So we have, um, prime minister, former prime minister Shinzo Abe. Um, who came back to serve as prime minister of Japan for the second time, I believe beginning in 2012. And he came back with a, with a very clear program to end, uh, deflation in Japan, which had been in place since, you know, the nineties. Um, so really over two decades and, um, and, uh, that he could… be very many Japanese issues, very destructive, uh, to Japan. So he came back with a clear program of, of, of sort of reigniting Japanese growth. And that was called Abenomics. So we'd love to hear from you, uh, first of all, like what is, what exactly, what is Abenomics and to what extent has it been successful.
Keiko: Yep. Thank you. So Abenomics, um, you know, as it describes, basically, uh, really, [00:14:00] um, target to kill this deflationary situation and it made the economy grow again, so that Abenomics basically has three arrows. We call so first the arrow, as they say, uh, flexible, or they use the word “decisive monetary policy.” So, and to kill this, this issue. And then they've implemented actually like extraordinarily quantitative easing and in a bring in, uh, inflation target of 2%. And however this inflation target is sometimes like really hard to achieve, um, at the end. And, and then they also put, um, somehow like, you know, they have a tax hike as well, you know, hoping that, you know, this will bring up somehow like an inflation target to [00:15:00] 2%, but you know, every time like some, you know, all market correction happens, uh, the, basically Japan couldn't really, um, exit this quantitative easing. So that was a little bit of trouble. And you know, of course, if the, uh, you know, if quantitative easing is continuous, then you know, stock market, you know, kinda like, you know, go up and then that goes up actually, uh, in short time, but eventually, uh, because of the, uh, actual GDP growth is, is staggered. And it has been like that for over like 10 years below 2% GDP for Japan.
So, um, it is very, um, economic policy… has a list of a contradictory, um, uh, argument actually. Um, and it experts, uh, feels that it [00:16:00] was like not succeeded and then many says that it's still like helped, you know, stock market a little bit. And it was good. And then also like the announcement of, uh, um, that the government was actually positively worked, uh, especially, uh, to, um, international audience, I believe so.
Jesse: Um, so I guess when, when thinking about, sorry to interrupt, um, when thinking about sort of the success of Abenomics, cause it's really aimed at growth, I believe. Um, what are sort of the key measures that, um, Japanese public or Japanese policy makers who are looking to, to, um, to evaluate how successful, when you look at the stock market, are they looking at consumer prices? Are they looking at unemployment? They're looking at GDP growth, something else?
15:15Keiko: uh, [00:17:00] yes, I think it ultimately is a, this, you know, um, CPI is, uh, is one of the key items and GDP growth. And GDP growth like it's all comes to actually, uh, other, uh, subset of policy. But, you know, we have a huge issue as like aging society. So our demographic, you know, um, uh, is really like, you know, over-65 year old population is now, uh, 30% of whole like Japanese population. So that is like really like, you know, uh, how to support this GDP growth with this like aging society as a huge issue.
Jesse: Right, because you're going to have fewer, a smaller percentage of the population who's working, um, supporting a larger growing popular percentage of population that's not working who's, uh, elderly in, [00:18:00] on top of that. You have an overall population that's shrinking, so it's like a double effect. Isn't it?
Keiko: Yup. Yup. Exactly.
Jesse: So, so, um, so when we think about, um, well let me ask you another question. So is to what extent was Abenomics the formula more or less what was being prescribed by, you know, Western particularly United States, you know, sort of policy types, you know, that, uh, worked in the Clinton administration or Bush administration, you know, those economists, you know, whether they were talking about Reaganomics or Clintonomics, but the idea was, you know, liberal, you know, liberalize markets, open up, you know, to competition, open up labor markets.
And that was sort of the, the key in addition to perhaps a lot of maybe [00:19:00] perhaps stimulus fiscal stimulus, monetary stimulus, but how much of these, this formula really is far out from, from what the, they were particularly the United States was really pushing Japan to do going back, you know, even in the 1980s.
Keiko: Hmm. Yeah, I think, um, you know, the Abenomics are like, kind of like compared to like Reaganomics, uh, like they put like a physical policy in it, and then he wants, to increase the government spending, especially on the infrastructure or like, again, like we have, um, problem as, uh, our national debt as, you know, a high ratio of GDP, which is like two times of GDP, which is very high.
Uh, if you compare it to other developed country, so. [00:20:00] But, so this is, uh, you know, kind of like stimulus, uh, package and the government tried to put it forward. So, and I think, you know, in terms of the economics, um, um, main reason that it’s not, uh, successful as expected as, uh, once, uh, the government, uh, input the tax hike and consumption tax hike from 5% to 10% is still low. But, you know, then, you know, kind of like consumption killed, like it was killed, uh, pretty, um, severely. So, and then also the salary increase did not happen as expected. So, so that is like, you know, um, the real, uh, GDP itself, like, um, not really growing. ...
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